Money creation is an international issue | Guest columnists


As Messenger readers will know from a previous guest editorial (“Who Makes Money & Where Does It Go,” January 28, 2017), most of the money flowing through our economy is in the form of account money created by banks. as they make loans.

The fact that banks create money when granting loans has not been widely recognized by bankers or economists, but – thanks to a national referendum initiated by citizens in Switzerland – the ability of banks to create money with just a few touches when granting loans is now easily admitted and into the light of day. The Swiss referendum, the Vollgeld Initiative, called for a vote to change the way Swiss money is created. He would have ended the usual banking practice of creating money through loans and transferred the power to create money to the Swiss National Bank.

The referendum drew international attention to the issue of money creation. A major article titled appeared in the Wall Street Journal on June 2 titled “A Shocking Challenge for the Banking System“.

Every growing economy needs a continuous supply of new money to function. The Vollgeld Initiative proposed that new funds be created by the national bank and distributed to the Swiss federal government and the cantons (Swiss states), presumably to be spent directly in the economy in support of public goals and programs. national. Part of the money created would even have gone directly to Swiss citizens. The powerful Swiss banking system and the Swiss parliament campaigned fiercely against the initiative, but it still garnered 25 percent of the Swiss vote. Although the referendum was not passed this time around, it has succeeded in raising fundamental questions about how money works – and should – work in an economy. Monetary reform movements are increasing in countries around the world.

Many reasons for reform can be cited. For the Swiss, the major issue was economic stability and the use of “fake” money created by banks. The banking system has not changed much since the collapse of 2007-2008. Many recognize the potential instability of the current system and believe that repetition is likely, if not inevitable. Instability stems from banks creating too much money, i.e. easy credit in good times, producing levels of debt, both personal and government, that cannot be managed. .

Banks are encouraged to lend as much as they can, within the limits imposed by the risk, because loans are the product that banks profit from. When the loans produce real economic growth, corresponding to the growth of the money supply, there is no problem. But lending has always tended to exceed real economic growth, through lending for speculative and non-productive purposes, such as buying houses only to resell them when prices rise. As a result, we have increasing debt levels and a continued devaluation of our currency, reflected in the rise in prices.

The current system, in which all new money is created by commercial banks as they make loans, allows those banks to direct where new money goes. It is not suitable for roads, bridges, water supply systems, education, health care, etc. It goes where the banks can give secured loans. If this new money were created by the federal government, as required by Article I, Section 8 of the US Constitution, it could be used to support our physical and social infrastructure. Or, because the monetary system should be seen as belonging to all of us, that is, part of the commons, at least some of all new money could go directly to citizens.

Because our money is currently created in the form of debt (in the form of credit), interest payments flow on every dollar in circulation from the large number, the users of the money, the small number, the lenders who have the privilege of creating it. It is one of the main drivers of the concentration of wealth in less and less hands, largely in the financial sector. This concentration of wealth erodes democracy as the wealthy few come to control the elections, the government and everything in between. The fact that the government does not create money, as prescribed by the Constitution, leads to public austerity and the collapse of infrastructure. An extreme concentration of wealth coupled with the weakening of public institutions is a recipe for social collapse.

Perhaps the most compelling argument for monetary reform is that the current system depends on growth for its own stability. On a finite planet, growth cannot continue forever. An economy that uses resources faster than they can be replenished by nature and produces waste faster than nature can absorb it is not sustainable. We must reject the current system that demands growth and adopt one that can provide stability both in times of growth and in times of non-growth.

The system must give way to change. It is time for us to come together to determine how this change can be implemented in a way that avoids collapse, provides a smooth transition, and leaves a future for our children. Proposals are available. They were formulated in this country as well as in Switzerland, England and the Netherlands, and are being promoted in many other countries as well. They should be subjects for discussion, policy dialogue and future research.

About Ruben V. Albin

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